Supply-chain Partnership is Not Single-source Purchasing

The supply-chain partnership (SCP)––a preferred relationship between suppliers and purchasers of industrial materials and components––is not a new phenomenon. The automotive and retail industries, among many others, have been using SCP for decades. It’s the origin of the just-in-time (JIT) inventory-management system, in which suppliers deliver a steady flow of materials and components to a manufacturer, eliminating the need for the manufacturer to maintain extensive on-site inventories.

Nevertheless, SCP is new to the electrical-construction industry, few successful working models can be cited. This is due to electrical contractors’ lack of experience with SCP, not its shortcomings, although the nature of the construction-contracting business may discourage electrical contractors’ reliance on SCP. The traditional bidding process is competitive and causes adversarial relationships all the way from the owner of the contracting company to the manufacturer of the electrical goods.

In today’s economy, full employment and emerging new markets require a more productive workforce, and SCP is one of the most effective ways to improve productivity of the field workforce because it reduces material handling.

Additional in-house benefits of SCP are reduction of inventories (which will free up working capital), purchase orders, and estimation effort. Eliminating the time estimators spend shopping around gives them more time for accurate estimating and cost analysis.

A Working Example

Inventory was always a thorn in the side of Gene Dennis, the chief executive officer of Universal Systems, a successful electrical-contracting company in Flint, Mich. In March of 1997, Dennis sought help to reduce inventory levels. "As a contractor," Gene said, "I should not have to carry any inventories. I should be able to buy the material I need and return what I don’t use."

He was partially correct. A contractor can reduce its level of inventory only by having accurate estimates, project management, and SCP. To achieve this, the process must start on the job site by automating some functions in the field, such as material handling to take the daily pressure off the project manager, giving him or her time for up-front pre-planning and scheduling. That is why we start with SCP instead of estimation and/or project management.

Starting with the material handling aspect of the Universal Systems process, the decision was to put in place a SCP to reduce the inventory and benefit from other advantages. A cross-functional group was founded to establish the feasibility of a SCP. (For more detail, see EC magazine’s July 1998 cover story). A wish list, The Statement Of Work (SOW), was created and sent to the major suppliers as a request for quotation. One of the SOW’s conditions was that the supplier would purchase the existing inventory and create an in-house bar-coding and material management system to allow electronic data interchange (EDI). We ranked the suppliers subjectively and objectively and awarded the SCP to St. Louis, Mo.-based Graybar Company.

Within six months thereafter, the number of purchase orders a year dropped from 4,000 to 1,200, inventory was reduced from $200,000 to $16,000, inventory counting time went from 22 man-days to four hours, and the accuracy and timeliness of delivery increased to better than 99 percent. Estimators also had more available time. These are just some of the savings.

Adjusting Contractor-Supplier Relationships

What Universal Systems did should not be attempted without an expert’s help. SCP needs to be approached with caution until it has become an accepted method of business practice in the electrical contracting industry. It is not like a fax machine that can be bought and used immediately. Just as the current contractor-supplier relationship has taken shape over more than a century, SCP needs a very thoughtful and organized approach.

Inherent human relationships and habits must be taken into account and dealt with. Most estimators, project managers, and purchasing agents have developed personal relationships with suppliers over the years. These relationships may or may not be advantageous to the company’s operational profitability, but they are an important factor in creation of an SCP.

One of the most overlooked aspects of an SCP is the working relationship between the contractor’s employees (upstream), the supplier (midstream), and the field electricians (downstream). At the outset, each company may have different goals and a fear of exposing its limitations or weaknesses.

For example, in today’s prevailing operational model, a supplier is informed only about certain parts of the bid relevant to him or her, and most of the time suppliers are brought in only after completion of the bid documents. Under these circumstances, suppliers are not interested in whether your company wins the project, because they have an opportunity to supply material to whoever wins. In an SCP, the supplier joins the estimating team to help win the project. This is not "normal" today and will cause initial discomfort for the participants.

Today, the contractor assumes all the risk. In an SCP, the supplier shares the risk. If a supplier in an SCP relationship waits until the estimate is complete, he or she will be in an awkward position later if changes based on his own needs or those of the people in the field are requested.

Attitudes towards working together as an SCP team must change so that the people upstream are willing to share all of their information with the people downstream. Trust and joint responsibility among the group members is essential for the success of the group. This, combined with the willingness of the downstream people to take a little more risk, will bring any SCP team a long way on the road to success.

Of course, everyone must realize that the ultimate goal is to satisfy customers.

Another obstacle in SCP teamwork is the variation in profits between team members. The SCP requires an open-book approach to project management and contract and material profits. Will this be difficult? Absolutely. The truth is that all partners are equally interested in and needful of profits. The partnership should allow everyone to make more profit together than they would alone. Traditionally the contracting firm and the supplier companies have not been willing to share lessons learned, profits, or even current processes. How can a team function when its members cannot trust one another?

The Role of Senior Management

While most of the success of an SCP team is due to personnel at the working level, efforts can be thwarted by a lack of focused management support. Senior management's main role is to create an environment conducive to SCP integration by establishing the framework within which the working-level teams must deal with one another. Another responsibility is to ensure that all of the group members have the necessary depth and quality of skills. Each team should be reviewed to compile a list of weaknesses, along with an action plan to strengthen the team through education, training, and experience. Managers also can invest in tools, such as estimating programs, EDI, bar-coding, and modern accounting programs, that will aid and support SCP integration. In summary, senior management needs to support team decisions, remove organizational barriers, and supply the team with the best available tools.

One way to achieve integration is to form SCP teams made up of all interested parties: electricians, finance, warehouse, engineering (if any), project management, and estimation from the contractor’s company, as well as order-taking, EDI, sales, and delivery representatives from the supplier responsible for the entire SCP. They would agree upon cost, timing, quality, and manufacturing details. Each team member would be responsible for, and have a vested interest in, the SCP’s success.

Conclusion

A SCP cannot and will not happen by itself. It is a very engaged and intense process with tremendous financial results for all the participants.

The more involved the field workforce can be in planning the job, the smoother the transition to an SCP will be. This will happen if the focus during the process is on the entire system. Also, an SCP requires a sharing of responsibility, positive management involvement, good communication, and excellent working relationships at all levels within the organizations involved.

Implementing these fundamentals will create functions that are more aligned with one another where work is performed concurrently. Rework and the number of complaints before and during the job will be reduced. Overall, SCP integration will reduce waste, increase profits, and enhance customer satisfaction.